Americans seem to regard estate and gift taxes as necessary to prevent unwanted intergenerational accumulations of wealth. Although only 2% of estates now pay the estate tax, considerable revenues are generated. Since the insurance industry and the ABA would likely oppose their abolition, look for transfer taxes to continue, but to affect fewer taxpayers. Note: President Clinton’s budget proposal would eliminate non-business valuation discounts, and would repeal the QPRT exception to Chapter 14’s valuation rules. Whether or not this legislation passes, considerable transfer tax savings are still possible with effective tax planning. . .

Consumption taxes have never gained in popularity despite being praised by Republicans for years, perhaps because Americans resent inherited, but not earned wealth, and are therefore disinclined to tax even conspicuous consumers. . . The flat tax remains the “neglected stepchild” of conservative presidential aspirants who resurrect the proposal every 4 years. Most people reject the premise that all taxpayers should be taxed at identical rates. Expect more progressive income tax rates, a continuation of the post-Reagan trend. . . Popular antagonism is, however, exhibited toward capital gains taxes which, although still above historic levels, are well below the summits reached in the mid 1980’s. Too much revenue would be lost by eliminating capital gains tax. Expect no significant near-term changes — but possibly a downward bias. Legitimate conversion of ordinary income to capital gain seems a fertile area for tax planning.

The IRS appears to be on the verge of becoming an entirely changed agency — one that is actually accountable. Bruised badly by negative public sentiment and calls for its abolition, forced collections and levies are down sharply. Everyday dealings with the Service have become easier. Look for this trend to continue. To prevent a decrease in compliance, expect withholding and reporting rules to be strengthened, and penalties to be increased. A case in point: President Clinton proposes increasing the substantial understatement penalty for corporate taxpayers from 20% to 40%.

Neither Republicans nor Democrats appear willing to risk the political fallout of underfunding Social Security, even if it results in foregoing an immediate tax cut. Competing proposals ensure robust funding to strengthen the Social Security system. Despite Republican Representative Hastert’s complaint that Mr. Clinton’s budget proposal “ambitiously spends almost every cent of the surplus,” the President would likely relish vetoing tax legislation that would divert funding from programs he supports.

The President’s budget proposal would grant small businesses a modest tax credit for implementing a SIMPLE plan. A new defined benefit plan exclusively for small businesses would provide minimum guaranteed payments, an option to receive payments over a term of years after retirement, and the ability to benefit from favorable investment returns. . . Mr. Clinton has also proposed permitting employees to make pre-tax contributions to IRAs by having those wages withheld. Although the IRA deduction would be eliminated, overall savings to employees would result compared to current rules.

Some proposed tax accounting provisions bear note: (i) the installment method would be repealed for accrual basis taxpayers; (ii) no deduction would be allowed for punitive damages paid by a taxpayer; punitive damages paid by an insurer would be includible in the income of the insured; (iii) basis adjustments with respect to partnership distributions would be made mandatory; (iv) heirs would be required to use reported estate tax values as the basis for income tax purposes; and (v) basis allocations would be required in part-gift, part-sale transactions.